Amazon.com, Inc. (AMZN) reported earnings last week and caught investors off-guard. In a seemingly rare move, the company missed revenue estimates, sinking the stock on Friday. Amazon shares closed down 7.6%, erasing nearly $120 billion of market value.
However, the real shock came when Amazon voiced its expectations of much slower sales growth in the third quarter of 2021. Gross revenues are expected to grow 10% to 16% next quarter. On the surface, that sounds great, but it's a clear slowdown indicating that perhaps the pandemic tailwind is over. Quarter-over-quarter and year-over-year comps will be difficult to beat now that people are trying to return to normal.
- Amazon caught investors off guard when it missed revenue estimates in its latest earnings report and guided for slower revenue growth next quarter.
- The e-commerce behemoth is struggling to meet demand, with labor shortages hitting the company hard.
- The company is still posting phenomenal growth, and Big Money has loved the stock for years, suggesting that Amazon could quickly get back on track.
This "return back to earth" was expected, but perhaps not to the degree management discussed on the earnings call. This may have you wondering if Amazon is no longer a great investment. Is the reckoning on the horizon?
Quick answer: No. Hang on ... Sorry—I had to interrupt this writing because I needed to buy something on Amazon. I'm back now ...
Let's quickly look at Amazon's business environment horizon, the company's strong fundamentals, and whether or not there is big demand for shares.
Amazon's Environment Horizon
Amazon spent gobs of money last year to increase its capability to meet demand, dropping a mere $52 billion to bolster capacity. If that doesn't boggle your mind, the company also hired almost half-a-million people, adding 460,000 new employees.
Even with that, the company is struggling (in Amazon terms) to meet demand. Management said that the amount of one-day deliveries dropped and has not yet recovered to levels before COVID-19. And demand will continue to grow: the pandemic brought many new Amazon Prime members, which means more demand down the road.
Labor shortages confront the whole country. But with Amazon's size, it's hitting hard. The company is needing to spend more on sign-ons and raise wages to entice new workers. And when you add recent negative press about working conditions, it's easy to see the need to spend to hire. To be clear: these are growing pains, not issues with the underlying business.
In other good news, Amazon's international business turned profitable five quarters ago and is powering forward, earning more than $1.6 billion.
Despite a disappointing earnings report, Amazon still boasts some phenomenal numbers. One- and three-year sales and earnings growth is double-digit awesome, with three-year earnings growth topping +108%. Amazon also enjoys a 40% gross profit margin.
Yes, the company is firing on all cylinders. Now, let's talk about the stock.
Amazon Has Been a Big Money Favorite for Years
When sizing up a stock investment, it's important to consider institutional demand. If Big Money is loading up on fundamentally superior stocks, it increases the likelihood of winning over time. One way to figure out whether that is happening is to look at price action coupled with volume. When stocks spike higher on volume surges, it's a good indication of institutional buying.
Amazon is a bona fide outlier stock. That means it's one of the best performing stocks ever. These are the kinds of companies I look to look for. Here's a snapshot of fundamentals and technicals I care about with sizing up a stock. Just for a fun scorecard, juice stands for good, so-so stands for okay, and not ideal is a poor score:
On the left, we clearly see a company with monster fundamental strength. On the right, we see a company with recent technical weakness from its disappointing earnings. Down 5% over the past month, Amazon stock is underperforming the S&P 500 by 14% year to date.
On the bottom right of the table above, we see Amazon's outlier status. That means it was ramping in price on big volumes while scoring well fundamentally 32 times since the summer of 2014. That is very strong when looking long term.
To give you an idea of what Big Money buying looks like, below is a chart from 2019. I've put arrows on a few points in 2019 and 2020 when unusual buying appeared:
Also notice at the bottom of the chart the rise in accumulation during 2019 and 2020. That's an indicator you can do at home.
The Bottom Line
Amazon's disappointing earnings spooked investors. The nature of the reporting miss is related to growing pains, having difficulty keeping pace with demand, and struggling to hire. To me, these are good problems to have.
Sales and earnings are growing, even if growth is forecast to slow a bit. The company is profitable. Most importantly, Big Money has loved the stock for years. Since 2015, shares are up over 900%!
Now I can't give personalized advice. But to me, Amazon is a great company. My bet is that the stock will get back on track in no time.
Disclosure: The author holds no position in AMZN at the time of publication.